Thoughts on ways to improve the management of professional services firms

Friday, August 19, 2011

Why multi-tasking is impossible

There is a fair bit of debate in Australia at the moment about multi-tasking. It's usually phrased in terms of kids who do their homework, watch TV, SMS and play a game.  it's sometimes expressed in terms of women having greater skills than men in doing multiple things at once.

My view is that multi-tasking, at least as normally expressed, is impossible.

To start with a simple example.

Say that I am cooking and listening to the radio. Normally, cooking is a routine task involving physical activity. The mind is not totally engaged, so that I can listen and work. Say, however, that I need to consult a recipe and actually make a decision. The mind is now engaged; the radio drops out.

Alternatively, say that the radio becomes very interesting. The mind is now engaged with it. Cooking will normally slow and even stop.

Another example still involving cooking. Normally in cooking, there are time breaks during which you can watch TV, hang out washing, sort something. At one level, you seem to be multi-tasking in the sense that you seem to be doing two activities or more at once. In practice, you are sequential tasking,

It may seem that those in very busy management roles are multi-tasking. In fact, they become skilled at task shifting and chunking, moving quickly from one task to another.

Leaving aside the tension involved in this, there is a cost where the move from one task to another reduces efficiency. That is why so much management advice centres on ways to increase time available for specific tasks - shut the door, turn off the emails, etc. If we could all multi-task in terms of doing two tasks at once, then this would not be necessary.

One of the difficulties with the discussion on multi-tasking is that is misleads. Not only does it imply that we should somehow be super human, it also confuses thinking about the organisation of work.     

Wednesday, August 17, 2011

Sustainability vs short term managerialism

As a professional adviser, I try to help firms improve business performance and to resolve problems. More and more, I have found a conflict between reality and aspirations. Reconciliation of that conflict comes back to one word, sustainability.

At a macro level, if the total business objectives set by all firms exceeds the possible growth rate in the economy, then some firms must fail to achieve objectives. If the gap between total firm targets and what is possible becomes large, then the shortfall between objectives and performance for most firms will also be large.

Since remuneration often depends upon achievement of immediate financial objectives, the incentive for managers to do whatever is required to get to immediate target is great. This leads to short termism. Cut now, with the costs coming later. In aggregate, this results in increasing economic instability.

Obviously, the position varies between firms.

If I am advising a start-up or a firm in a rapidly growing market place, then I provide one set of advice. If I am advising a firm that wants to increase market share and is prepared to pay the price, I provide a second type of advice. If the business is unprofitable, then that's another set of advice.

But what do I do if I am providing advice to an existing profitable business in a mature market that wants to improve performance to achieve new growth targets dictated by what is really managerial hubris? How do I say that you are doing the wrong thing? How do I say keep on going as you are, just improve at the margin?

If the reality is as it is that most businesses cannot achieve their targets, then shouldn't we be adopting a new approach? Isn't sustainability combined with incremental growth better?

Say you are a reasonably profitable law firm. What do your partners, your owners, really want?

They want to be able to get on with their professional work. They want a stable income with prospects of reasonable increase. Most don't want the prospect of big increases that risk the business.

Think how nice it would be as an adviser if your client said we want to improve what we do over time. Our focus is on business sustainability, not big targets. We want you to help make things better for clients, for partners and for our staff. We want you to give us practical suggestions to achieve this.

It would be nice, wouldn't it! 

Friday, August 05, 2011

Why do we underestimate the value of broad based skills?

I followed up China's foreign reserves - what they mean, what might happen with a post on my personal blog, Australia's economic fragmentation. Since then we have had the ending of the US debt crisis, new troubles in Europe, bad US economic data and something of a stock market crash. In the first minutes of trading this morning, falls slashed $A56 billion of the value of Australian stocks. There is a smell of panic in the air.

All this took my thoughts in a different direction, one that may seem a bit odd. One problem now is that many of those involved whether as commentators or traders, those trying to decide how to respond, actually lack the broad based experience required to respond sensibly. Further, they live in a wired twenty four hour world where initial responses feed on each other, where reporting heightens nervous excitement.

My original qualifications were in history and economics. Then I worked for twenty years as a professional economist and economic adviser before moving into the private sector as a strategic consultant and manager of professional services firms. I no longer claim to be a professional economist - the profession has moved on. In a way, the economics of finance has replaced the economics of economics, financial modelling has replaced a focus on economic principles.

I was in Shanghai when the Global Financial crisis struck. I watched it unfold on the television screens. Upon my return to Australia, I was struck by the fevered nature of reporting. Australian reactions just did not seem to match what I understood of the fundamentals affecting the Australian economic performance. I was actually drawn back into my past world as an economist.

The analysis that I did then suggested that, so far as Australia was concerned, the GFC was highly unlikely to have the type of catastrophic results forecast. It just wasn't going to happen. I said so, and I was right.

One thing that I have learned from my experience is the importance of time. There is a fundamental disconnect between most current analysis on the economy and the actual lengths of time involved in economic processes. For example, just as it takes time for economic imbalances to emerge, so it takes time for them to unwind. In similar vein, it takes time for new policy initiatives to work, especially where capital investment is involved.

In 1929, the effective closure of the London capital markets to Australian borrowings plunged Australian Governments into effective depression. In similar vein, the GFC had very real world affects. Yet it pays to stand back and look. You do not need complicated models to understand what is happening, nor do ideological positions help.

Economics is about relationships. If you are going to understand what is happening, you have to look at the relationships in general and as they affect your sector. One of the reasons why I have such a high opinion of Australia's Reserve Bank lies in the standard of their analysis of relationships. I may not agree with their analysis, but I can understand it and therefore respond to it. That is not true for a lot of the other analysis I have seen.

I am not sure why we have come to so distrust general skills and broad based experience, why we now place so much weight on narrow specialisation and very task specific requirements. You see, the problem is that narrow specialisations with task specific requirements are very good at getting things done within defined parameters, but hopeless at coping if those parameters change. Then everybody is at sea, lost without a paddle or, sometimes, even the boat.

I know that I sound jaundiced, but today we have managers who have never managed, economists who know a lot about a little but very little about a lot, lawyers whose knowledge is largely limited to a narrow specialisation, policy advisers who see their key roles in terms of narrowly defined statistical outputs. It's all very odd.

While I have been writing this post, share prices have continued to decline. Time, I think, to stand back and look at what is really going on.   

Tuesday, August 02, 2011

China's foreign reserves - what they mean, what might happen

A post on my personal blog, Saturday Morning Musings - fall of the US dollar, pointed to the growing mismatch between the pattern of currencies traded and the evolving structures of the world economy. There I said in part

All I am saying is that I feel that, in the longer term, traded currencies are likely to better reflect real patterns of economic activity. In the past, the reserve currencies (gold, sterling, the US dollar) facilitated global transactions by providing a measurable store of value in circumstances where other currencies were either not traded or were of uncertain value. The position today is different. Who can really say that the US dollar is a secure currency?    

The types of changes that I am talking about will take time. However, that time may be less than we all expect.

This led a colleague (Denis Wright, an historian) to ask if I could write a simple non-technical explanation of the significance of China's foreign exchange reserves. It's actually quite an important topic, so here goes.

Important identities

In the comments that follow, there are just two economic identities that you need to bear in mind.

The first is that if one country has a surplus on its balance of payments, another country or countries must be running an equivalent deficit or deficits. The reason for this is that one country's exports are other countries' imports. Globally, imports and exports must balance. If one country is selling more than it is buying, it acquires foreign exchange reserves. However, since imports and exports must balance in total, that means that other countries are buying more than they are selling. They must be running deficits that exactly match others' surpluses.

The second is that if you are going to buy more than you sell, then you have to fund the gap through borrowings or capital flows of some type. Otherwise, you can't buy.

Growth in China's foreign reserves

Initially China's foreign exchange reserves were relatively small, then they started to accelerate. The following gives an indication of scale:

Year Reserves $US billion
1980 2.5
1990 29.6
2000 165.6
2010 2,847.3
today c3,200

The increase has obviously been quite dramatic, an increase of over $US 3 trillion in 20 years. To put this in perspective, Australia's total GDP is something over $US1,200 billion! 

Why did China's foreign reserves increase?

There is a lot of argument on this one, but I think that we can simplify.

On the Chinese side:

  • The country had a high domestic savings rate meaning that local cash was available for investment.
  • The country had a large industrious underemployed workforce, meaning that low cost labour was available for new activities.
  • The Chinese currency, the yuan or renminbi, was largely non-traded. The Government was able to keep the value of the currency low, facilitating export growth.

It takes two to tango. Elsewhere:

  • Reducing trade barriers facilitated China's export growth.
  • Savings rates in many developed countries dropped. With rising asset prices, consumers felt able to increase consumption by more than income, thus providing a growing base for Chinese exports. This was aided by tax cuts, placing more income in individual hands.

Increasing Chinese reserves necessarily flowed back into into developed countries. In a very real way, the Chinese themselves were funding their own exports.

China's reserve conundrum

The accumulation of large quantities of investable funds by a country is not unique. The British Empire, the economic superpower of the nineteenth century, accumulated such investment wealth that it took the rise of the US, a great depression and two world wars to wipe it out. However, China is in a different position.

One difference lies in the then power of the City of London. This marshaled surplus funds and channeled them round the world from mining companies to railroad investments, from the Russian Empire to Argentina. China has no domestic equivalent.

A second and critical difference is simply time. China's accumulation has happened very quickly. China has looked for ways of redeploying reserves via things such as a $US 300 billion sovereign wealth fund and direct overseas investment, but all these take time to build up. In the meantime, China has to put its money in deposits or some form of financial investment. Here it faces a problemCurrency Turnover League Table

To illustrate this, have a look at the attached graph. This was included in my original posts and comes from one of my favourite bloggers, Stubborn Mule.

The graph simply shows the most important currencies in the world in trading terms. The Chinese authorities simply cannot invest their reserves willy nilly, but have to put them where they can be realised as required. This means they have very few short term choices.

To illustrate their problem further, consider the Australian dollar, the world's fifth largest traded currency.

According to newspaper reports (I don't have the links), China has decide to place 1.6% of its foreign reserves in Ozzie dollars or Ozzie dollar denominated securities.  That sounds a tiny proportion, but it actually amounts to over $US51 billion. That's quite a large amount relative to the size of the Australian economy. You see their problem?

The immediate practical effect is that China is locked into holding US and especially US Treasury securities, something like $US2,000 billion. This makes what happens in the US kind of important to China in financial terms.  

The longer term

In both the short and longer term, economic changes in China and its trading partners will affect the equation. I will discuss these in another post. For the moment, I just want to focus on what might happen to the Chinese reserves on the assumption that they continue to be significant. This links to the point that I made in my original post, about likely changes so that traded currencies better reflects the pattern of trade.

Here I want to point to just three things:

  1. As China globalises, its capacity to invest effectively in other countries will increase , thus shifting Chinese assets from financial to real investments.
  2. As more trade and investment is written in Chinese currency, the Chinese will be able to invest more in assets denominated in their own currency.
  3. The number of significant traded currencies will rise, making it easier for China to invest in a bundle of currencies, not just the US dollar.

If I'm right, these changes will have quite profound influences on the distribution of economic power and activity.